April 24, 2009
/24-7PressRelease/ -- California's Foreclosure Surge Leads to Stricter Regulations
Article provided by Law Offices of H. Michael Soroy, pleaes visit us at
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As the national foreclosure crisis continues to grow, the federal government and several states are taking corrective measures to diminish the fallout from predatory lenders and fraudulent subprime mortgage bankers. Several of these measures aim to make it easier for owners to retain their homes while they renegotiate their mortgages. One such legislation passed by Congress was the Mortgage Forgiveness Debt Relief Act of 2007, which eliminates taxes on mortgage indebtedness. Congress hopes the measure will encourage restructuring between lenders and homeowners and discourage impending foreclosures.
States are also taking proactive steps to forestall the rising foreclosure rates. Because foreclosure laws vary from state to state, rehabilitative measures also differ.
Overview of California's Foreclosure Laws
In California, owners may face two types of foreclosure proceedings. The first is a judicial foreclosure, which is somewhat rare and requires the lender to sue the owner in a court proceeding. In this type of foreclosure, the owner can redeem the property through a buy-back from the successful auction bidder one year after the auction. The lender can also pursue a deficiency judgment against the borrower to recover the difference between the amount owed (including fees and penalties) and the amount received from the home auction.
The second type of foreclosure is a non-judicial foreclosure, also known as "foreclosure by power of sale" (since the mortgage document must contain a sales clause). More common than judicial foreclosures, non-judicial foreclosures are handled by trustees appointed in a deed of trust. In these cases, lenders forego their rights to pursue deficiency judgments. Also, proceedings can be deferred for a year based on allowed postponement reasons set forth in California Civil Code 2924 g(c)(1). Possible reasons include a mutual agreement between the lender and owner, bankruptcy, a beneficiary's (lender) request, a trustee's discretion or operation of law by the court (which can occur when there is an allegation of fraud against the lender). Non-judicial foreclosures are preferred due to the shorter time frame of the proceedings.
California's legislature has noticed a subculture of fraud arising from the foreclosure economy. Specifically, California Civil Code 2945-2945.11 declares that:
"homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded pursuant to Section 2924 until the time surplus funds from any foreclosure sale are distributed to the homeowner or his or her successor."
To protect homeowners from unscrupulous "consultants," the regulation broadly defines those considered to be a consultant, including those who solicit or make representations to owners that, for compensation, they can stop or postpone foreclosures, obtain extensions, obtain forbearances from beneficiaries, or help owners avoid credit disrepair, along with other rehabilitative or preventative actions.
Because of the various ways that foreclosure consultants can commit fraud against unknowing homeowners, the code provides homeowners the right to demand that consultant service contracts be in writing, as well as the power to rescind foreclosure consultation contracts the owners deem fraudulent and misleading. The code's intent is to promote fair dealing; California courts are allowed to liberally construe article provisions to achieve this intent.
Civil Code Section 2945 also provides relief for homeowners victimized by unscrupulous foreclosure consultants. A foreclosure consultant who violates the terms of the code can be fined up to $25,000 -- or even face imprisonment. Additionally, victimized homeowners can recover treble damages -- three times the compensation given to the foreclosure consultant -- along with reasonable attorney fees.
New Protection for Homeowners
Recently, California's legislature updated the state's foreclosure provisions by enacting California Civil Code 2923.5. Designed to further protect struggling homeowners from predatory lending practices, the new law requires lenders to contact the borrower prior to initiating foreclosure procedures. California's legislature intended that this change in access to the state's foreclosure process would serve to limit the effects of further, unchecked foreclosures on California's struggling economy.
According to the code, "a mortgagee, trustee, beneficiary or authorized agent may not file a notice of default ... until 30 days after contact is made." When contacting the borrower, the lender is required to "assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." The lender is also required to inform the borrower that he or she has the right to a subsequent meeting, no more than 14 days after the initial meeting, at which time the borrower's options for avoiding foreclosure may be further discussed.
Finally, when filing any notice of default to initiate foreclosure proceedings, lenders in California are required under this new law to include a detailed declaration that states that the borrower was contacted to assess his or her financial situation or lists the efforts made to establish such contact.
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